Are Biweekly Mortgage Payments Right For You?
Your mortgage payment is likely your largest monthly expense – but what if you could split it up and pay off your mortgage sooner? Biweekly mortgage payments allow you to pay 50% of your monthly mortgage payments every 2 weeks. These payments can synchronize with your payday, reduce interest expenses and help you finish years ahead of the payment schedule. Here’s how to tell if biweekly payments are right for you and how to switch from a monthly pace.
What Are Biweekly Mortgage Payments?
Biweekly mortgage payments are installments you pay on your mortgage every two weeks instead of once per month. Rather than paying the full amount at the end of the month, you pay half of your standard payment at 2-week intervals. With biweekly payments, you make 13 payments each year instead of 12 with a monthly payment.
Monthly Mortgage Payments Vs. Biweekly Mortgage Payments
Conventional monthly mortgage payments require one payment per month. On an annual basis, this approach is less expensive than biweekly payments because you make one less payment. However, as the years pass by, you’ll pay more in total interest with monthly payments because you’ll have your loan for longer.
An example can demonstrate the advantages of biweekly mortgage payments. Say your loan is $200,000 on a 30-year fixed-rate mortgage with a 4.125% interest rate. Here are the mortgage expense calculations for monthly and biweekly payments.
Monthly Payment Schedule
Biweekly Payment Schedule
Total Interest Paid
How Do Biweekly Mortgage Payments Work?
Paying on your mortgage loan once per month results in 12 payments per year. On the other hand, biweekly payments result in 26 half payments (52 weeks per year divided by two). Because each biweekly payment is half your monthly mortgage payment, 26 divided by 2 equals 13 full payments. In addition, your first 12 payments take care of the interest for the year, allowing your final biweekly payments to hit the principal only.
Pros And Cons Of Biweekly Mortgage Payments
Switching to a biweekly mortgage payment schedule gives borrowers advantages and disadvantages. Here’s a breakdown of both.
Pros Of Biweekly Payments
Choosing biweekly mortgage payments will provide the following benefits:
- Paying off your mortgage quicker: Adding one full payment per year helps you finish paying your mortgage before the model your amortization schedule lays out. For example, the situation in the table above allows you to pay off your mortgage early by 51 months. This change shaves off more than 4 years from your mortgage term.
- Saving money on interest payments: The biweekly pattern allows you to target the loan principal with your final two payments. This way, the interest rate accrues on a lower balance every year than a typical monthly payment schedule allows. Therefore, you’ll save thousands of dollars on interest over the life of the loan.
- Aligning payments with your pay schedule: Biweekly payments can occur in the same rhythm as your paychecks, if you’re paid on a biweekly basis. As a result, you’ll pay your mortgage on the same day your employer pays you, ensuring that your mortgage doesn’t disrupt your budget. In addition, the smaller payments are more manageable for those on fixed incomes.
Cons Of Biweekly Payments
Biweekly payments come with the following drawbacks:
- Having less money for other expenses: Biweekly payments raise your housing costs by one month’s payment every year. As a result, your monthly budget will be more strained and have less capacity for other expenses.
- Possibly facing prepayment penalties: Some lenders impose prepayment penalties for paying off a mortgage early. If your mortgage includes this policy, getting ahead of your amortization schedule can result in thousands of dollars of additional costs when you pay off your mortgage.
- The potential for additional servicing fees: On top of prepayment penalties, some lenders charge additional servicing fees to borrowers who want to change the frequency of their payments. These expenses usually help the lender cover the additional interest they would have received in your original mortgage payment schedule.
How To Set Up Biweekly Mortgage Payments With A Lender
Setting up biweekly mortgage payments involves calling your lender or signing into your online account to make the change. Usually, you’ll pick a day between the 1st and 14th of the month for your first payment, allowing you to sync with your paycheck deposit. Your second payment will occur 14 days after your first payment.
In addition, it’s crucial to know the following details to make the switch:
- That the lender or loan servicer allows biweekly payments
- Whether prepayment penalties are involved
- That the borrower’s extra payment goes toward the principal balance on the mortgage loan
- That the mortgage has a fixed interest rate, as adjustable-rate mortgages may cause monthly payment fluctuation
How To Make Biweekly Mortgage Payments Yourself
If your loan servicer doesn’t provide a biweekly structure, you can implement one yourself. You can set up a biweekly mortgage payment schedule in your budget and set the money aside every 2 weeks to prepare for an end-of-year payment. Remember, it’s vital to check with your lender about prepayment penalties before doing so. Here’s how to implement the plan:
- Divide your monthly payment by 12.
- Place 1/12 of your monthly payment into a savings account each month so that at the end of the year, it’ll add up to one full monthly payment.
- Continue making your regular monthly mortgage payments.
- Send your lender one extra payment toward your loan’s principal balance at the end of the year.
Should You Switch To Biweekly Mortgage Payments? What To Consider
Now that you understand the nuances of biweekly mortgage payments, you can evaluate their suitability based on your circumstances. Here are the factors that can influence your decision:
Current Loan Terms
Evaluate your current loan terms to see if biweekly payments are realistic. For instance, they’ll work against you if your lender charges prepayment fees or servicing fees. On the other hand, your lender might have a biweekly payment program you can switch to for free.
Mortgages typically have lower interest rates than other debts. For example, student loans, auto loans and personal loans may provide more of a financial benefit to repay first. As a result, it’s advisable to use a debt calculator to see what debt costs you the most interest every year and focus your efforts there.
Savings And Emergency Funds
Biweekly payments mean sinking more money into your house every year. While borrowers can typically access their equity in a pinch, cash-out refinances cost money and might raise your interest rate. On the other hand, you can put the extra month’s payment that would have resulted from biweekly payments into a high-yield savings account, increasing liquidity and earning interest.
Alternatives To Biweekly Payments
If biweekly payments aren’t feasible for your budget or your lender doesn’t allow them, you have other options to save money on your mortgage. The following alternatives can help:
- Refinancing to a lower interest rate: A rate-and-term refinance means exchanging your mortgage for one with a lower payment due to an interest rate reduction or term extension. In addition, this tool allows you to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, stabilizing your monthly payments.
- Getting rid of private mortgage insurance (PMI): If your down payment was less than 20% of the purchase price when you bought your home, and you have a conventional mortgage, it came with private mortgage insurance, or PMI for short. Borrowers pay lenders PMI as part of their monthly mortgage payments, making the mortgage more expensive. This insurance is for the lender’s benefit, providing extra revenue to cover the risk of the borrower defaulting on the loan.
You can eliminate PMI from your monthly expenses by reaching 20% equity in your home. For instance, say you bought a home for $300,000 and put down $30,000 (10%), meaning your mortgage is $270,000. Once you reduce your mortgage balance to $240,000 by making payments, you’ll have 20% equity (provided that your home is worth $300,000), allowing you to eliminate PMI.
The Bottom Line
Biweekly mortgage payments offer a strategic approach to managing your mortgage, leading to substantial savings on total interest and an earlier payoff date. However, it's crucial to weigh the pros against the cons and to consider budget constraints and any associated fees or penalties. Ultimately, how helpful switching to biweekly payments will be depends on your specific financial situation. Consulting with your lender and conducting a thorough financial evaluation will help you make the most informed choice for your mortgage strategy. If you’re interested in switching to biweekly mortgage payments, get started online today.